Do you really need 20 percent down? Mortgage myths that keep buyers renting

No, and believing it may be costing you years

No. Twenty percent down is the point where a conventional loan typically no longer needs mortgage insurance, not a minimum to buy a home. HUD says an FHA loan can require as little as 3.5 percent down, the Department of Veterans Affairs offers no-down-payment loans to eligible borrowers when the price is not above the appraised value, and conventional programs include low down payment options, including 3 percent down options my team offers for qualifying first-time buyers. Grant and down payment assistance programs can help with part of what remains.

In more than twenty-three years of lending, I have met many people who waited years to save a number they never actually needed. Some of them were right to wait for other reasons. Many were not. Here are the myths I hear most, and what is actually true.

Where the 20 percent idea comes from

The number is real; it just answers a different question. On a conventional loan, putting less than 20 percent down typically means paying private mortgage insurance, which protects the lender if the loan defaults. The CFPB notes on its Loan Estimate guide that mortgage insurance is typically required if your down payment is less than 20 percent of the home's price.

So the real question is not whether you can buy with less, but whether the monthly cost of mortgage insurance is worth getting into a home sooner. For many buyers it is, especially because on a conventional loan that insurance is not permanent. Once you build enough equity and stay current on payments, federal rules let you ask your servicer to cancel it, and at a later point it generally ends automatically; my guide on why a mortgage payment changes when the rate does not covers how that works.

Myth: you need perfect credit

Credit affects which programs you fit and what the loan costs, but the bar is not perfection. FHA loans are designed with easier credit qualifying, according to HUD. Conventional loans price by credit tier, so a good score can still get a workable loan even if it is not excellent. And one late payment from years ago rarely matters as much as people fear.

Where credit really is the obstacle, the answer is usually a plan rather than a no. My team helps clients build credit when that is what stands in the way, and the first step is often simpler than people expect. My guide on repairing credit yourself before applying covers what helps and what backfires.

The other half of the picture is debt. Lenders look at how much of your monthly income already goes to car payments, student loans and cards, and that ratio can matter as much as the score. Paying down a small installment loan or a card balance can sometimes do more for an application than a few extra points of credit score.

Myth: down payment assistance is a scam or a trap

Assistance programs are real, and many are run by public or nonprofit agencies. The Texas State Affordable Housing Corporation, for example, describes down payment assistance of up to 5 percent of the loan amount for down payment or closing costs, offered as a grant that never has to be repaid, a deferred forgivable second lien forgiven after three years if you stay in the home, or a deferred repayable second lien repaid when the first mortgage is sold, refinanced or paid off. Its programs are accessed through participating lenders, and it has a version for hero professions such as educators and public safety workers and a version for everyone else.

The honest caveat is that every program has rules. Income limits, price limits, credit requirements, homebuyer education and how long you must stay in the home all vary, and the rate on an assisted loan can differ from an unassisted one. Assistance is not free money in every case, but it is not a trap either. It is a tool, and a lender who works with these programs can tell you whether it helps your numbers.

Timing matters with assistance programs. Funds can be limited, applications usually go through the lender alongside your mortgage, and some programs require a homebuyer education course before closing. Start the conversation early so the program fits your contract dates rather than delaying them.

• Grant: does not have to be repaid
• Forgivable second lien: forgiven over time if you meet the conditions
• Repayable second lien: repaid when you sell, refinance or pay off the first loan
• Each comes with its own eligibility rules and fits only certain loan types

Myth: if one lender said no, they all will

Lenders do not all use the same rules. Conventional loans follow Fannie Mae and Freddie Mac guidelines, but many lenders add their own extra requirements on top, called overlays. A file declined because of an overlay may be approvable under the agency's actual guidelines. We do not add our own overlays to Fannie Mae and Freddie Mac loans, which is one reason we can sometimes help borrowers who were turned down elsewhere.

The same is true for buyers who do not fit a builder's preferred lender. If your new-construction purchase stalled because you fell outside the builder lender's guidelines, it is worth a second opinion before you give up the house.

Myth: a pre-qualification letter means you are approved

Lenders do not use the words prequalification and preapproval consistently. Some letters rest only on what you told the lender over the phone, and no letter of either kind is a guaranteed loan offer. A letter issued after a short phone call can look identical to one issued after an underwriter reviewed your documents.

My team pre-underwrites files: an underwriter reviews income, assets and credit before you make an offer. If any lender is issuing your letter, ask whether a human underwriter has looked at your file and what conditions remain.

A related myth is that shopping several lenders will wreck your credit. Several mortgage credit checks made within a short shopping window are generally recorded as a single inquiry, so you can compare two or three lenders without multiplying the effect on your score. Keep the comparison to a few weeks.

Myth: veterans' benefits are complicated and not worth the trouble

The VA loan is one of the most valuable benefits available to eligible veterans and service members. The VA lists no down payment as long as the price is not above the appraised value, no private mortgage insurance, and fewer closing costs that may be paid by the seller. Most borrowers pay a one-time funding fee unless exempt, and you need a Certificate of Eligibility, which an experienced VA lender can help you request.

If you are eligible and assumed the paperwork was not worth it, compare a VA loan with the alternatives before you decide. My side-by-side guide on FHA, conventional and VA loans explains when each one wins.

The mistakes that hurt more than any myth

Myths delay buyers. Mistakes cost them houses. These are the ones I see most often once someone decides to move forward, and nearly all of them are avoidable with a phone call before acting.

• Draining every dollar of savings for a bigger down payment and leaving nothing for closing costs, moving or repairs
• Moving gift money into your account without a gift letter or paper trail
• Opening new credit or financing furniture before closing
• Assuming you do not qualify for assistance without checking
• Choosing a loan only on the rate without comparing mortgage insurance and fees
• Shopping for houses before a real pre-approval

So how much should you put down?

There is no single right answer. A bigger down payment lowers your loan amount, can improve pricing and can reduce or remove mortgage insurance. A smaller one gets you into a home sooner and keeps cash in reserve for the things every new homeowner faces in the first year. In my experience, the buyers who feel best after closing are the ones who kept a cushion rather than emptying their accounts at the closing table.

The right number comes from comparing real scenarios. Ask your lender to show the same house with two or three down payment amounts, including the monthly payment, mortgage insurance and cash to close for each. That comparison usually makes the decision obvious.

Think about the first year, too. New homeowners often face costs they did not budget for: a water heater, a fence repair, window coverings, a lawn mower, and in Texas a summer electric bill for a bigger house. Keeping some cash available for those expenses is part of a sound plan, and an underwriter may want to see reserves on certain loans anyway.

Finding your number with my team

When you reach my team at First United Bank in Dallas, we start by learning what you have saved, what help you might receive, your credit and your goals. Then we show you which programs fit, including low down payment conventional, FHA and VA options and any assistance you may qualify for. If you are buying your first home, my earlier guide on whether you qualify and how to get from unsure to closed is a useful companion.

We serve buyers across Dallas–Fort Worth and Texas. Nothing in this article is a promise of approval or a rate quote; program rules change, assistance funds have their own limits, and a licensed loan officer should review your situation before you decide how much to put down.

Questions people ask me